Deposits

Placing a Deposit on a property these days is getting harder and harder as property prices keep rising and saving for a deposit is taking longer.

About a decade ago, Australia’s property investors and buyers could access 100% LVR (loan-to-valuation) loans with ease, in other words, you could borrow the entirety of the property’s value, and in some cases, loans as high as 105% were relatively available. But now lending criteria from banks is stricter, and most banks and lenders have restricted the LVR ratio that they’re willing to extend to borrowers.

How much will I need?
A general rule of thumb is a Purchaser will need a minimum deposit of 5% of the Property purchase price, however, it is up to the lender you choose to approve the amount of deposit you will need and the type of home loan you are seeking.

If you are able to access a mortgage with a 5% deposit your lender will require your home loan is covered by Lenders Mortgage Insurance (LMI) or a Low Deposit Premium. It is wise to seek the best home lending advice available before you decide on a home loan and if you want to work with a 5% deposit then ensure the lender is willing to do that and you understand the extra expenses that are associated with a higher loan as a result of a lower deposit. Your broker can help you work through the options here.

The deposit is paid at the time of exchange of contracts.

Check the Vendor is willing to accept a 5% deposit so you are not disappointed if it Is refused. Most vendors ask for a 10% deposit but will accept a 5% deposit to ensure a sale.

An important point to keep in mind with paying a 5% deposit is to make sure your Conveyancer adjusts the front page of the Contract to – the Deposit is 5% – if you leave the Deposit marked on front page of Contract as the Deposit is 10% percent – then if the Conveyance does not settle and you default the Vendor will be entitled to recover the remaining 5% when in fact you only paid 5%. These terms are generally covered by a special condition in the Contract – ask your Conveyancer if this has been written in.

In law if there is a dispute the question arises – what was the intention of the Purchaser? If the intentions are not listed in the contact then they cannot be proved. Before you sign and exchange contracts ensure the Contract outlines all your intentions – this equally applies to the Vendor. As with every contract remember “Caveat Emptor”.

Deposit Bonds
Deposit Bonds are an interesting concept – particularly if you have money tied up in a term deposit, a family home or other investments and need more time to convert your assets to cash. A Deposit Bond is an instrument that, by agreement with the vendor, can replace the need for a cash deposit, it enables the purchaser to defer payment of their deposit until settlement. A Deposit Bond is NOT a policy of insurance – it is a form of surety or guarantee.

Over the past 10-15 years Deposit Bonds have become popular and they are relatively easy to secure if you qualify. They are available as short term deposit bonds for settlement periods up to 6 months and long term deposit bonds for settlement periods between 6 and 48 months. Long term deposit bonds are generally used for the purchase of ‘off the plan’ properties.

If there is a default in completing the purchase of the property the Vendor can take the original bond to the Insurer and claim the full amount of the Deposit Bond. In turn the Insurer will seek reimbursement from the purchaser plus costs and expenses. The vendor can apply for a Deposit Bond to use to purchase another home with the same settlement date as their sale (provided the Vendor of the home they are buying has agreed to accept a Deposit Bond).